Oct. 8 (Bloomberg) -- Federal Reserve Bank of Cleveland
President Sandra Pianalto, who has supported record Fed
stimulus, said she favored a reduction in bond buying last month
because of the potential costs of the program.

“While to date the risks have mostly remained theoretical,
I remain convinced that we need to be cautious in our expansion
of asset purchases,” said Pianalto, who doesn’t vote on
monetary policy this year and plans to retire early next year.
“For me the improvement in labor markets seemed substantial
enough to support a scaling back of the asset-purchase program
at last month’s” policy meeting, she said.

Policy makers are debating how and when to start curbing
record stimulus amid a deadlock over the federal government’s
budget and a lack of agreement on raising the debt ceiling to
avoid default. The Federal Open Market Committee at its next
gathering on Oct. 29-30 will weigh the impact from the
government’s partial shutdown as they debate tapering the $85
billion pace of monthly bond buying.

The U.S. economy is likely to continue its slow and steady
progress “assuming the fiscal situation is resolved fairly
soon,” Pianalto told the Economic Club of Pittsburgh. The FOMC
was concerned last month with “the effects of restrictive
fiscal policies” and “that the fiscal debate could add
additional risk to financial markets and to the broader
economy,” she said.

Taper Debate

Policy makers have been split on the impact of the shutdown
for slowing of purchases, or tapering. Richmond Fed President
Jeffrey Lacker said last week a government shutdown shouldn’t
reduce economic growth permanently, while Atlanta Fed chief
Dennis Lockhart said a lack of government data will make him
“somewhat more cautious” in considering whether to slow the
bond buying.

“I hope that the additional evidence that the committee is
looking for arrives soon” that permits a slowing on purchases,
Pianalto said. “Monetary policy can be powerful, but it has
limits.”

The Cleveland Fed leader said she expects U.S. growth of
about 2 percent this year, with expansion picking up next year,
and a “gradual reduction in the unemployment rate.” Inflation,
which has been below the Fed’s 2 percent target, is likely to
rise to the objective, she said.

“Even when we ease up on the rate of new asset purchases,
we will still be some distance from beginning to increase short-term rates,” she said.

The Fed has pledged for more than a year to press on with
asset purchases until achieving sustainable gains in the labor
market. The central bank announced a third round of quantitative
easing in September 2012 to reduce longer-term interest rates,
stoke economic growth and combat unemployment.

Pianalto, 59, is the longest serving of the Fed’s 12
regional presidents, having become leader of her district bank
in 2003. During her 10-year tenure at the Fed, Pianalto was a
reliable supporter of Fed Chairman Ben S. Bernanke, never
dissenting from a FOMC decision.